It was once thought that investing in impact funds meant sacrificing financial returns to achieve social and environmental ones. But a recent report from Cambridge Associates and the Global Impact Investing Network seemed to flip that notion on its head, at least when it comes to timber funds.
As we noted last week, the study found that, as of the end of June 2016, 18 impact timber funds raised between 1997 and 2014 produced a pooled net internal rate of return of 5.9 percent, compared with 3.3 percent for 24 conventional funds over the same period.
While there are challenges to investing in the timber market, timber funds are one of the best ways to build an impact component into a diversified portfolio, offering an inflation hedge, low volatility and a low correlation to traditional asset classes.
“Timber as an asset class is uniquely positioned in that the goals from a pure impact standpoint can be totally aligned with those that are financially motivated, and we’ve actually found that becoming more impact-focused has the potential to create a more attractive timber return profile,” Ryan Sullivan, senior investment manager with Aberdeen Asset Management, told Agri Investor.
The study found that impact timber funds performed more strongly than the other two asset classes measured, real estate and infrastructure, which showed only mixed results. The report’s authors noted that impact investing in timber was more prevalent, making up more than one-third of the capitalization of the total private timber sector over the vintage years analyzed.
Impact investors focused on timber “recognize that value may come from additional revenue streams, such as land conservation or restoration, in addition to sustainable timber production, as most of the timber-focused funds in the sample indicated,” according to the report.
Sullivan noted that, as a fund of funds manager, Aberdeen naturally moves away from longer-life fund structures – inherent in conventional timber funds – towards those creating liquidity earlier in the investment life. Conservation easement, a voluntary legal agreement that limits land uses in order to protect its conservation, is a staple of the impact funds his firm invests in and allows for this.
“Multiple of capital is the same, but the IRR is better because you’re shifting up your cashflow profile,” Sullivan explained. “If you sell off your easement on year three or four, you’re getting a much chunkier distribution, which has meaningful impact on your IRR.”
‘Impact’ means different things to different investors, but there are established frameworks which attempt to measure it. The Cambridge and GIIN study relied on the GIIN ImpactBase, Cambridge’s MRI database, and the ImpactAssets 50.7 Inclusion.
Sullivan highlighted the particular importance of a stamp of approval from international non-profit the Forest Stewardship Council, which monitors and puts restrictions on the harvesting of timber. While those without the FSC stamp of approval may be able to better take advantage of timber price increases – for instance, cutting down and processing swaths of forests when this happens – the study indicates that adhering to impact principles is likely to afford greater value over time.
The results of the study are telling, but not a tell-all. As investors become more concerned with integrating impact principles into their portfolios, there are definitive opportunities to do so through timber.
Whether timber’s overall low-returns profile – which has prompted the likes of North Dakota Retirement and Investment Office to consider lowering its exposure to, and even exiting the asset class altogether – fits most investors’ risk-adjusted return expectations is another matter altogether.
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